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Investors turn to sustainable investment opportunities

A quick profit was what investors cared about before the financial crisis hit the markets. Now, more investors are looking to invest in an ethical and eco-friendly way - but that also means weeding through the scams.

Before the financial crisis hit global markets in 2008, investors didn't give much thought to sustainable investment. Sustainability was merely seen as a term for environmental and development policies. But after the stock market slump, investors slowly began investing in businesses with sustainable production ethics and lending money to banks financing social projects in developing countries.

"In recent years, we have seen a remarkable change of attitude," said Christof Lützel from Germany's GLS, a green bank. "An increasing number of people eat a healthy diet, buy natural cosmetics, drive cars that don't need much gas and use green electricity. In addition, they want a green investment or a green bank."

The GLS bank differs from its conventional competitors, as it only invests in eco-friendly projects. Though the bank was founded back in the 1970s, only recently has it seen a rise in its customer numbers.

Going green

There is a definite trend toward going green and supporting so-called "ethical-ecological investments," said Jörg Henning Frank of Umweltfinanz, a company based in Berlin that sells eco-friendly financial products.

People are living in a healthier way and investing in sustainable projects

"In the '90s, it was the true believers who were eager to know where their money was invested," Frank said. "They wanted to make sure it didn't go to the armaments industry or to companies supporting child labor. By now, this has definitely become a trend.

"People want to do something good with their money," he added. "And the financial crisis has definitely helped us. Everyone knows now that a conventional bank will invest money where no one would actually want to invest money."

Transparency is one thing green banks take very seriously and so far they don't have to worry about their credibility. However, experts warn that ethical-ecological fund providers are not always trustworthy. According to Frank, these fund providers claim to be offering funds with exclusively sustainable and social corporations, but it's merely a marketing strategy meant to fool investors.

Fooling investors

"There are a lot of funds trying to look green, but if you actually look into it, it's a bluff," Frank said. "There are 250 ethical-ecological funds; it's quite hard to separate the wheat from the chaff."

For investors, it's almost impossible to tell whether a fund is truly green. Of course, they can read all the reports on sustainability by the different companies, but the truth often lies behind the numbers and text. Another possibility is to rely on the assessments of the so-called sustainability rating agencies or eco-rating agencies, who rate the big DAX and M-DAX companies based on social and ecological criteria.

Sabine Riedel of the Hanover-based rating agency imug explained that the agency evaluates companies using 250 different social, ecological and ethical criteria. It also checks whether companies have an environmental management system, are affiliated with child labor, work with genetic engineering, promote women and how they deal with bribery and corruption.

In recent years, the rating agencies have also been focusing on how companies deal with their suppliers, said Rolf Hässler of the sustainability rating agency oekom research.

"We examine what kind of guidelines the companies set for their suppliers," he said. "They are often based in emerging economies and developing countries. We also review how the companies verify compliance with their guidelines."

The rise of eco-rating agencies

As demand for ethical-ecological investment grows, eco-rating agencies are becoming more important. This positive development will lead to more transparency on financial markets, according to Joachim Schwalbach of Humboldt University in Berlin.

Eco-rating agencies are becoming more important

This praise comes as a surprise, as traditional rating agencies like Standard & Poor's or Moody's - which look into credit standings of companies and states - have been subject to growing criticism that their assessment lacks transparency, influences financial markets and allows for speculation. But eco-rating agencies are by no means like traditional rating agencies, said Rolf Hässler of oekom research, as conventional rating agencies are paid by the companies issuing the bond.

"We are different, since we rate companies whether they want to be rated or not," he said. "We regularly check 3,000 global companies. We are paid by those who use these ratings."

Usually those ratings are used by institutional investors, such as foundations or churches. Meanwhile, even pension funds have started to follow the sustainable investment trend, though it's catching on slowly in Germany, said Sabine Riedel of imug Hanover.

"Especially with long-term investments, sustainability makes sense," she said. "This is based on the idea that companies taking care of social and ecological issues today will also be successful on the markets in the long run. That's important for pension payments, and it should be required to invest the money in a sustainable way.

"In Germany there are very few pension funds that are investing in a sustainable way because of the pay-as-you-go pension plan, where most of the money is put away by the government and won't be invested at all," Riedel added.

But other countries such as Austria, Britain, the Netherlands and Scandinavian nations have already taken things a step further: by investing pension money in sustainable projects.